The Relativity bankruptcy case primarily revolves around money. But at a potentially pivotal hearing tomorrow, U.S. Bankruptcy Court Judge Michael Wiles will also have to be a judge of time.
As for the money: the court will decide whether to approve a $10.5 million loan to keep Relativity going. It’s the second installment in a $45 million Debtor In Possession financing plan from current lenders following the $9.5 million first installment that Wiles approved two weeks ago.
Time, though, is the key issue as he crafts the bidding process — including conditions to clarify what assets a buyer could pick up, and what liens, leases, and loans come with them. There are at least 16 motions or objections to Relativity’s proposed plan which includes a calendar requiring anyone interested in buying the film and TV company to identify itself by September 3 and submit a bid by noon on September 11, ahead of an auction on September 16.
It’s not entirely built on air: The judge will be presented with a proposed agreement Relativity made on August 9 to sell its film and TV assets for $250 million to lenders including Anchorage Capital, Luxor Capital and Falcon Investment Advisors — also known as Stalking Horse Bidder and RM Bidder.
Like most of the lenders, they want to wrap this up as quickly as possible. Cortland Capital Market Services said on July 31 that every day Relativity grapples with Chapter 11 restrictions its films and shows lose value, the company loses money, and legal costs rise.
But the Stalking Horse deal might push one of Wiles’ hot buttons. Terms include a 1.5% break-up fee for Stalking Horse if it doesn’t prevail, and reimbursement of up to $1 million in expenses.
Two weeks ago the judge called a break-up fee “inappropriate,” and bristled at conditions that he said would “handcuff my ability” to be fair to everybody.
The extra fees “are reasonable and appropriate in light of the size and nature of the transaction and the efforts that have been, and will be, expended by the Stalking Horse Bidder,” says Relativity’s investment banker, Blackstone Group’s C.J. Brown. What’s more, “they were heavily negotiated in good faith” and were “necessary to secure the Stalking Horse Bidder’s commitment.”
He adds that Relativity’s timeline “provides parties with sufficient time to obtain information and formulate and submit a timely and informed bid to purchase” the company.
But others will argue tomorrow that the plan moves too fast.
Unsecured creditors including ad giant Carat USA, NBCUniversal, Cinedigm, and Technicolor object to terms that might rush a sale for an “inadequate” price to Stalking Horse. Relativity is a “large, complex and privately-held global entertainment business” and figured it was worth a lot more than $250 million when it raised debt.
“Without a fair and reasonable sale process which provides third parties adequate information and the time to evaluate each of the Debtors’ businesses in order to formulate competing offers, it will likewise be impossible for the proper value of those businesses to be realized. “
Netflix says it wants the judge to make sure that anyone who buys Relativity fulfill its contract to supply a “certain minimum number” of films to the streaming service each year. Relativity has only delivered two so far in 2015, raising “substantial concerns” about its ability to meet the minimum. Relativity’s proposed sale timeline would give companies such as Netflix just four days to object, which it says is “insufficient.”
Viacom’s also troubled that Relativity’s sale plan offers “either no information or only the sketchiest of information about which of Viacom’s contracts will be affected.” That has made it “impossible…to determine what position to take” about a potential sale. Among other things, Viacom wants a formal sale notice to be sent via email instead of through the U.S. Postal Service.
The loudest objections likely will come from a lender group called RKA Film Financing. It has separately sued Relativity CEO Ryan Kavanaugh and other officers for fraud saying that they used most of its $85 million in loans to prop up the company’s balance sheet — not for its intended purpose: to buy ads for several still unreleased films including Masterminds, Somnia, Disappointments Room, and Kidnap.
RKA fears that the films, the collateral for its loans, will be mixed with other assets in a sale. Relativity’s “lack of concern” over the group’s claims on the films “has become a consistent pattern.” It wants Wiles to let them go in and take the three films so RKA can license them to another distributor. The group also wants the judge to order Relativity to account for how the cash RKA loaned has been used.
All in all, it could be a long Friday for Wiles. He’s a no-nonsense jurist who practiced bankruptcy law since 1989 at Debevoise & Plimpton before being named to the bench in February. As an advocate his clients included fairly staid companies including American Airlines, Delta Air Lines, and Wheeling-Pittsburgh Steel — and creditors from high-profile scandals involving Enron and Bernie Madoff.
We’ll see whether they’ve prepared him for a case as complex, attention-getting, and plain weird as Relativity’s.